I think the problem is that the hashref returned from CGI::Vars() is a tied hashref, which XMLout doesn't seem to like. Making a copy of it as shown below seems to 'avoid' the problem.

#! perl -w
use strict;
use CGI;
use XML::Simple;

my $cgi= new CGI;
my $xs = new XML::Simple();
my $elements = $cgi->Vars();

my %copy = %$elements;
my $xml = $xs->XMLout(\%copy, rootname => 'source');

print $xml;

__DATA__
#output
C:\test>184342 "test=1&fred=bill&something=somethingelse"
'<source fred="bill" something="somethingelse" test="1" />
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Update: Removed redundant use of Data::Dumper.